Building wealth: How to bring your wealth generation forward

We speak with financial adviser Andrew Shakespeare from JSA to talk about the challenges many young Australians face when it comes to saving a deposit for their first home and building their wealth.

Andrew, what’s keeping Australians up at night when it comes to their finances?

We find generally that with many of our new clients, short-term cash needs are top of mind and many people are living paycheque to paycheque.

A result of this can be a fear of ‘bill shock’ - getting an unexpectedly expensive electricity bill or suddenly, the comprehensive car insurance is due or something else from left field hits them.

They fear that they won’t know how to cover it or they’ve been covering it with a credit card and then that it starts to get out of hand.

When people are responsible for a child or another financial dependent and their finding that their losing a bit of traction in keeping their finances under control, they can start to feel overwhelmed.

It has the potential to affect their family life - with their kids and their partner, feeling under pressure and “not being able to escape”.

I’ve found that these are common reasons that keep people up at night - especially younger people.

What does escape look and feel like for a person under financial stress?

For many, the light at the end of tunnel feels very far away and they’ve already been slugging it out for a long time.

This stress may lead to short term bad decisions where people sell their assets because they haven’t had their cash flow or banking structure in order.

Because they had a bad bill month and everything fell at once, they panicked and sold things when they didn’t need to.

Often you hear people talk about ‘financial freedom’ and I’ve found that this feeling means different things to different people. For those that have been under financial stress for some time, the definition of ‘financial freedom’ often just means that they feel they are back in control of the money coming in and money going out. They can see small signs that they are getting ahead, feel in control of their personal cash flow or have a cash reserve now built up in order to be prepared for the unexpected expense.

How about people with minimal assets, like the budding first home buyer, what are some of the fears are they facing regarding their finances?

It’s more-so a fear of missing out - and we’ve seen this more recently in the last 10 years with property price growth. For our clients in their twenties or their late teens they tend to look around at their peers and judge themselves as to how they’re progressing in comparison.

It could be comparing stages in their career or they might have seen a friend buy a home and they’re thinking “how come I haven’t bought a home” and that can cause both fear around missing out but also stress in asking themselves “have I done enough?” and questions of “am I good enough?”

When people get into their thirties and forties they tend to worry less about what their peers are doing, but for younger people the fear of missing out is very real.

The rise in property prices over the past decade has meant there has been this ever-growing need for saving more for that deposit, and after you think you've saved what you need, you find out that you need to save even more - like another ten thousand, for reasons completely out of the savers control.

How does our financial health affect our overall sense of well-being?

Yes, so we’ve often found that as soon as these stressors start to ‘cloud’ people’s minds, their productivity at work starts to drop because they just have other things on their mind and they can’t think as clearly.

And even at home, in more extreme circumstances – people can act like zombies around their family because of crippling financial stress.

And when you think about it - if the financial stress is having an impact on work, that doesn’t bode well for career advancement - so it potentially impacts wage growth as well.

The other side of it though is when people go to work and try to do more overtime and extra hours with no time for their family, their partner and kids, just to cover the cost of living. They may be bringing enough money in but, people can only do that for so long before they ‘burn out’ – sometimes it’s just not sustainable.

People have been taught by their parents “work hard, save hard” do the right thing, build a deposit and you’ll buy a home and everything will be alright.

And then they do that - they follow that process, they do those “right” things and they find that because of external forces - like being at different stage in their career, or rising house prices - they compare themselves to others and think “how come they’ve already bought a home? I’ve been following the same structure and I still haven’t got one!”

It can cause mental health issues and unnecessary pressure because people are trying are to keep the feeling of progression or they are trying to “keep up with the Joneses”. Nowadays with Instagram and Facebook, that FOMO effect can be amplified even more.

With regards to asking family for help to get into their first home sooner, I’m often saying to first time home buyers - put in place the right building blocks around cash flow and banking structures and prove that you are financially responsible first. It can then make the process for both yourselves and the family members much easier once there has been a track record of financial responsibility. They could then consider approaching family or close relatives who have assets that can be used as security and get into the home sooner.

So rather than waiting and saving for another 12, 18 months or 2 years - with property market changes and being unsure about how much money is actually needed for a future deposit, they may be able to buy a house sooner.

I think people need to have the confidence to ask for that help - and it’s a lot easier when they have their ‘ducks lined up’ - they have their financial structures in place.

It would be a hard conversation to have with family members around getting a guarantor for an extra bit of deposit for people who’ve been irresponsible or excessively relaxed with their money and savings.

A lot of the time people don’t want to ask for help because finance is such a personal topic - even with our closest friends or family members - we’re reluctant to tell people about our wage, our saving levels, and our debt levels.

It’s like this status symbol and there is a perception if you haven’t done well financially you haven’t done well at all.

It is these misconceptions that will often get in the way of putting in place the right strategy and having a better financial outcomes long term.

For people who want to ask for help, but aren’t sure how to go about it - what advice would you give them?

One of the questions I ask my clients is whether they have any family members who have equity or own their home and if so, what their relationship is like with them - just some basic questions to sound out whether there is a possibility of getting help from a family member as a guarantor on their first home.

I’ve been finding that more of my younger clients are now understanding the whole concept of family guarantors, which is great, but there is still an education piece we need to have around that potential for their mum and dad to help them out here. All parties need to seek their own advice to ensure that they understand the risks but also in the context of the benefit being provided.

If you go back ten years, property prices weren’t what they are today and I think that’s why this concept wasn’t talked about or as widely known about as it is now.

For us, it’s getting easier to have conversations with clients because they’re more knowledgeable about it, but it would be good if they understood more about how it worked.

A family guarantor is also relevant for people who want to consolidate or restructure their debt.

For instance, I have clients who we can see will have an explosion of income in the next few years but they’ve got all these smaller debts and a low savings level which they need to sort out first.

So it might take them 3 or 4 years to save a sufficient deposit to be able to buy a home but if they want to get into something now because it’s going to help them with their family situation or help them be in a position where they can start a family, having a guarantor can be a worthwhile option to explore.

Find out more about Regional Australia Bank's Head Start Family Guarantee

Whilst it’s not my responsibility to speak directly with parents or whoever it is that my client is approaching, I can help them understand the risks, how they can go about getting legal advice and of course, put together the hard numbers for them to discuss.

From my perspective, it’s important that before we even start to broach the subject with parents, we help clients to get their own situation in order first so they can be prepared for that conversation.

From the guarantor’s perspective - can it be a good opportunity for them as well?

I always say it’s better to give with a warm hand than a cold hand.

In terms of wealth, it’s better to see your kids enjoy the benefits of your wealth without you just forking it out to them - the kids still have to do the hard work and pay down debt - so it’s not about “giving them a free ride” but still enabling them to get ahead.

Non financially speaking, it can feel good to know that you’re helping out your kids or your loved ones that are responsible - without destroying your own retirement potential. To use their good wealth position to further their kids in life without limiting their own retirement needs.

There is certainly a warm and fuzzy feeling of “I have helped my kids out to get ahead” but I’ve seen people give gifts of cash, sometimes expected by the kids, and many parents out there are not willing to hand over cash if there is a lack of appreciation and respect for that money.

It’s much the same with inheritances, people don’t respect other people’s money because they didn’t have to go through the hard yards to earn it. It’s just human nature.

So, if they can do it in another way where they’re kids still have to go through the hard yards to give them a bit of a leg up to get that property sooner or whatever it may be just to go forward in life - it’s a bit of a win-win the way I see it.

Do you think sometimes it’s the people who ARE responsible with their finances that have a hard time asking for help to get into a home sooner?

Yes, for people who are responsible and have been conscientious savers you can imagine that they might think “if we go to mum and dad to ask them about being our guarantor for some extra funds they’re going to question and may even be disappointed in us because we shouldn’t need help” so I think there’s this fear of their parents asking them “why?” “Why do you need our help?”

In terms of wealth, it’s better to see your kids enjoy the benefits of your wealth without you just forking it out to them - the kids still have to do the hard work and pay down debt - so it’s not about “giving them a free ride” but still enabling them to get ahead.

It’s different for each generation as well. Everyone perceives their own generation as being the hardest generation to get ahead especially if you go back one of two generations - So as a young whipper snapper asking for a helping hand I guess the fear is that the parents will respond with “well look, we did it tough in our day, we had 18% interest rates we had to save - go see the bank manager, shake his hand…” and so on.

We hear it all the time - our client’s fear that they’ll say “no, you need to keep working hard”.

But I think part of the plan for anyone young is to actually articulate - not just in their own minds - but, if they’re going to have this conversation with their parents - why this will help out, in hard numbers.

Having those hard numbers and being able to start the conversation by saying: “Look, we’ve been putting a lot of thought to this, we just want to broach the idea with you - we’ll come back to you with some numbers if you’re keen - if not, that’s ok, we respect your decision”.

When they go back and provide those hard and fast numbers ready to show in black and white how this can bring forward their wealth generation - that's much more powerful.

Many parents out there will just help out and you don’t have to worry about it but having a well prepared conversation does build extra confidence if you’ve got your ducks lined up.

How should someone approach the conversation to ensure the best chance of success?

Firstly know your numbers both in terms of your cash flow and the numbers to show how this will help you out and why you need that help in progressing - without disturbing the retirement needs or whatever it might be for your parents or loved ones.

And also having a really good long-term strategy to tell to your parents - and that’s where an adviser can help add value to this story to help put to the parents.

By doing this you’re giving yourself the best chance both with raising it with your parents and also by getting some adoption by them – the best chance for them to say “yeah, why not?”

If they understand the risks associated with being a guarantor but can see how it would benefit you and further you immensely, you’re more likely to succeed.

There’s also a flow-on effect to keep in mind which could be important! What is happening as a result of not being able to get into a home? It could mean the delaying of having children for example.

People want to get the “nest” ready and have some savings put aside so they can be in a position to have part-time work with parental leave and so if you keep delaying having a family because you’ve got to save a deposit, for their parents there will be a delay in having grandkids.

When people start realising their financial goals can this motivate them to push past the fear to have this conversation?

Yes, so when you put this in black and white numbers - and sure there’s some assumptions built into those numbers, like wage growth and cost of living etc. - but when you show people in black and white the impact of doing one strategy over another and having that hard conversation while looking at the long-term impact, it motivates people.

It motivates people to do things that they wouldn’t have done when they were "comfortable".

I think that sometimes we need to bring ourselves into that space where we're a bit uncomfortable but also excited about the opportunity when we realise this is how this could turn out if we did have this conversation.

So making it very real where you can see it in graphs and the difference between reaching financial goals for down the track in 13 or 14 years away and then its brought forward by a whole number of years as a result of having just one conversation - it’s much more concrete, much more motivating.

You need to consider that the worst case scenario is people say “no”, and that could happen, yes, but I think the clearer you are about the numbers and the benefits even in their own mind the better the success rate from the conversation.

If it’s too wishy-washy or there isn’t a lot of thought put into what the goals are. If we're asking because someone else down the road did it or one of our friends did it and there's no direction - it’s just the new “in” thing to, then you’ve probably got less chance of success in even talking about the topic with parents let alone getting help.

In my experience, I’ve seen a much better success rate with people who actually demonstrate to themselves and parents "Ok, by doing something like this, here’s the black and white numbers this is how much this can help us longer term" - even if they're rough numbers.

Also, to demonstrate responsibility what I’ve generally seen is you need a minimum of 12 months because it factors things in like your regular yearly trip, which may be a large expense so 12 months factors that in and there is more confidence in your ability.

However, you can start the conversation sooner to alleviate the fear of having a “no” answer, for instance, if you start the conversation after 3 months but say “look, don’t say no just yet, if I can come back to you and show you how I’m progressing in 6 months, 9 months and 12 months, can we continue this conversation?”

What I’ve also done with a number of clients is by planning and using our worksheets we know exactly, each week what we should have in the savings account, and debt level week on week.

By doing this you can plan to have the conversation in say, November this year because you know you’re going to have twenty grand extra in your bank account and you can now demonstrate that you’ve been saving and it’s going to be a good time to chat with them.

And it’s just an extra worksheet in the background and everyone can build these things.

 

Andrew Shakespeare is an Authorised Representative (number 323781) and Credit Representative (number 366051) of Jeff Shakespeare & Associates Pty Ltd (ABN 27 001 854 397) who is a Corporate Authorised Representative of Matrix Planning Solutions Ltd ABN 45 087 470 200 AFSL & ACL No. 238256.

The views and statements expressed in this article are that of Andrew Shakespeare and not Regional Australia Bank Ltd.

The information provided is general information only and the information has been prepared without taking into account any particular person’s objectives, financial situation or needs. Before acting on such information, you should consider the appropriateness of the information having regard to your personal objectives, financial situation or needs.